Pandemic, Pandemonium and Panic | 2020 so far, in three words!

What a crazy three weeks it has been. Markets have shed closed to 30% as I write this. There is absolute mayhem in the world markets, future looks bleak. While this craziness unfolds, here are a few things that I recommend based on my experience with 2008 crash.

I am also writing this post for all those who have lost or are loosing considerable parts of their trading capital in these markets, either through trading or in their investing portfolios.

1. If you don’t know what’s happening stay off the tracks - In other words if you have not seen this kind of volatility and you don’t have systems and rules to structure your trade based on such volatility numbers, stay away. Always better to be flat than be in red. None of the systems designed for usual volatility regimes would work. We are in a totally different regime now, VIX at 62 is something totally different, I cannot emphasize this enough. I have friends and people who have written to me after having lost more than 60 to 70% of their trading capital.

2. If you are not well capitalized and trading as a novice these markets are not for you - Let me help you understand what is well capitalized. I personally do not recommend that you trade with any capital that is greater than 20% of your liquid net worth. Trading as a novice means, you do not have any back + forward tested systems, you are either trading on your hunch or on someone else’s hunch, which can be lethal.

3. Stay clear of Snake-oil vendors who promise 1% per day type returns or promise that they would help you recover your losses - They are leeches meant to suck blood out of people, that’s their business model. Please stay away from such promises. If you want to use their services just for fun please do, but do not put your money at risk.

4. If you have long term investments, either hedge them or move out - We are in all probability at the onset of a recession or a depression. Hopefully it stays within the median duration of a recession which is somewhere around 7 to 8 months. So there will be plenty of time for you to invest your capital. But holding on to your investments through a recession is a risky proposition. Unless you have surplus funds to deploy later.

5. Use the time to observe & learn and may be move on - There is absolutely nothing wrong is getting off the “trading mill” and re look at your approach to trading, your systems, and all that. May be time to leave trading all together and look at some new area. This may not be for you. Which is okay. You will have plenty of opportunities to invest and earn, if not trade.

6. Are there trading strategies that work in these environments? - Yes, there are but you cannot learn them overnight and deploy them the next day and recover all that you have lost. In other words, stay calm, learn slowly, trade very small, not to recover but to learn what works and what doesn’t

7. Lastly nothing is worth loosing you peace over - So don’t leverage, don’t take un-hedged overnight positions, the gaps in such volatile times can literally take you off trading for the rest of your life. As they say, its better to panic more than to panic less and lose it all.

Looking Back at 2019 and Looking forward to 2020

Apologies for the long break from blogging, and sad to say that moving forward the frequency of blogging will be low, the reasons for which are shared below. Here is/are a few of my reflections on 2019 and my plans as I look forward to 2020

What I learnt in 2019

1. Trading wise, it was an average year, nothing exceptional, however, with close to 5 years in trading and increasing capital base, my ability to size bigger on the same intraday time frame was a concern.

2. Diversification across time-frames in trading can help in smoothing out the P&L curve.

3. Diversification is also necessary as your capital base increases.

4. % of Snake oil sellers in Trading is way more than what I thought. So learning to spot one can in itself be a major edge in trading.

5. If you are after big money, and have serious intentions to make a business out of it, look at a scale-able business model, there are limits to how much you can grow your own money. Unless of course you are a billionaire yourself, then your concern should be to diversify your investments to achieve a optimal risk-adjusted return. But then if you are a billionaire you would not be reading this.

6. Design Trading strategies and systems, with consistent but a moderate alpha in mind.

7. Look for structural edges, for example “Theta decay” in Options is a structural edge, meaning its largely independent of other factors.

8. Avoid people who sell one set of Indicators/Indicator based strategies like plague. That will save you a lot of time and time is money.

9. Social media can be a great place to connect with some great minds, but its your sizing skills that matter, the ratio of good to bad is close to 1:1000. Blindly block people who tweet motivational and inspirational quotes, its akin to porn, gives you a delusional high. A lot of people who actually are subject matter experts wont have time to tweet, so they are not going to clutter your feed.

10. I lost my mother this year, and that made me realize the importance of taking care of one’s health, seeking medical attention on time, and thinking fundamentally about what is it that you want to do to be remembered by others when you are gone, and its absolutely fair to ask the question - How does it matter if I am remembered or not? Its personal at the end of the day.

Time flies and as you get older it flies faster. 2020 is there and we are almost 2 weeks into it. Anyways.

1. On the trading front this would be a year of diversification, on both product and time frames. I intend to trade Stocks as well in Short Time-frames and Options on Longer time frames.

2. I would also be testing and trading variants of the traditional StatArb and Relative Value Arb. strategies.

3. Automation is another major area of focus, meaning I would work on making all my strategies fully automated. This is the reason I expect to be more time constrained this year than earlier. That would also mean, a restriction on the intake for my mentoring program.

4. I would also be cutting down on Social Media interaction and time, so expect to see much lesser tweets, not that I am big on it.

5. Moderate focus on Health, again its a matter of time and priority, would be focusing more on function than form.

Thanks again for your time and reading about what I had to say. Will keep you all posted as I move forward on this journey.

What constitutes Quant Trading and what does not?

What constitutes Quant Trading?

Those of you who follow Indian finwit would have noticed the sudden appearance of the word “Quant”, as if almost everyone has had an overnight epiphany, and in some cases akin to some sort of ‘born again’ revelation. To me it looks like a thoroughly misplaced appropriation of the term. Read on to know more.

So let me clear the air about what actually is Quant Trading, the word Quant refers to Quantitative and Quant Trading is essentially a subset of Quantitative Finance.

Late Prof. Mark Joshi had written a note titled “On Becoming a Quant” in which he intelligibly describes what Quants do.

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The operative word here is “mathematical models”. Of course this can include probabilistic and statistical models as well.

So to sum it up, Quant trading is the application of Mathematics, Statistics and Probability theory in the area of trading.

For example, if you are looking at a simple Moving Average Cross over system, you may want to calculate the Conditional Probability and the Probability Distribution for various outcomes in terms of price. But merely trading a Moving Average Cross over system without having done the statistical work does not qualify as Quant trading.

Moving further, it’s important to understand that the Quant piece can be independently applied to the various aspects of trading. In other words you can use Quantitative analysis to find an edge through back-testing, likewise you can access the risk of various outcomes, you can also use Quant for execution to determine optimal sizing at a given point, and so on.

You can call yourself a Quant, if you are using Math or Stats for any of these applications.

The exhibit below is excerpted from the book - Inside the Black Box: A Simple Guide to Quantitative and High Frequency Trading (Wiley Finance Book 885) eBook: Rishi K. Narang - (On a side note, its a must read for any aspiring Quant)

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What does NOT constitute Quant trading?

Mere use of numbers in your trading does not constitute Quant trading. For example you may use number to denote, Price, Volume, Time, Average Time or derivatives of price as Average Price etc. But that does not mean you are a Quant.

You may also use numerical data representing, Bid Price or Ask Price / Orderflow or any numerical variable for that matter. However esoteric the variable may be, it still does not mean anything, so long as no Math or Stat model has been used by you in arriving at it.

I am sorry that things have gotten to a point where I have to say this, but they have. Look at the text I recently received. I rest my case here.

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Orderflow is Rubbish | A Study in Sarcasm

I came across this video in Youtube and couldn’t help sharing. This is crazy hilarious I warn.

Life as a Resource Allocation Problem | Year End Musings - Delivered late!

The missus and I were off to Bhutan this year end, and while I was there, I was receiving some calls to attend a trading conference. So there began a discussion on the value of attending conferences and my view on it.

My view is that trading or anything of value has to have a lot of nuance, which comes from years of experience and practice, and expert is an expert because he/she has developed that nuanced skill/intuition.

With that said, ask yourself as to what would you like to focus on, depending on were you are on your learning curve -

If you are a beginner - It would help immensely to find a mentor, and work with him/her to develop core skills, in other words try to be an Apprentice - Takes at least 8 to 10 Years

If you think you are at an Intermediate level - At this point, it would help to connect with more experts to understand what others are doing, and and build your skills by borrowing ideas and adapting them to your context, as Cal Newport says - this could be the Creative Active phase. - Beyond 8 to 10 years

If you think you are an expert - It would again help to engage with others in the space, to continuously learn and understand the space at a more macro level. This is at a point when you have reached Mastery - 15 + years of experience

Now the reason I called these things out is to help you contextualize - what would help you at a given point of time. I personally believe a lot of our adult life is a Resource Allocation Problem, the better we get at it, the better would be the outcomes.

We have these three fundamental resources which feed into one another - Time, Energy (Cognitive & Physical) and Money.

Money can help us buy Time a bit, but Energy determines how well we can use that Time.

Hence we need to ask ourselves where would you like to allocate your fundamental resources so as to achieve your goals.

You can use your time, money and energy to either attend a conference or perhaps buy a few books or may be fund a trading account. Which one these would help you get to your goals faster, and that depends on where you are on the learning curve.

Lastly think of it this way, if you have to choose a heart surgeon, which one of would you choose, the one who has spent 10,000 hours doing surgery or the one who has attended 100 conferences.

To flip the context - So which category of surgeon would you want to be?

Its the same with Trading.

Vacation Musings | Quantity vs. Quality of Ideas – What helps in the long run?

I often tell people that the job of a trader is more like a scientist on a path to discover something, because essentially discovery is a process of looking at various combinations and correlations of variables which are otherwise not observable to an untrained eye. Both are looking to discover something, the trader is looking for an “edge” an “idea” and the scientist is looking to find a cause or solve a problem.

So my question was to be a better scientist who makes several breakthroughs, should one focus on generating quality ideas or should we focus on generating many ideas some of which would fail and others may take us a bit closer to what we are looking for.

I came across this interesting article. - https://blogs.scientificamerican.com/beautiful-minds/why-creativity-is-a-numbers-game/

Which says, if you look at scientists like Edison, and others it seems to be a numbers game. The more your ability to generate ideas (good or bad), the more is the probability of you landing on a good idea.

So ask yourself, how many trading ideas can you generate? Is your mind constantly thinking about new ideas? Are you continuously testing and refining new ideas?

Announcement | Taking a short break

I thought its only fair to let you all know that, I have been extremely busy with some LOB data back-testing, Trading Strategy consulting projects and a data visualization project. All this does not leave me with much time to write meaningfully. So apologies for the lull on the blog.

I foresee the situation to improve in a couple of months, and I should be back on the blogging track.

For anything else feel free to write to me at srao@niftyscalper.com 

The Dark Side of Being a Full-time Retail Trader

Most aspiring traders that I have met, seem to have a few things in common

• They want to be independent i.e not to work for someone
• They also want independence in terms of their time, they perhaps want to spend time doing several things and not just trading
• They want to make some reasonably good amount of money by investing around a year or two worth of time

These are the sort of expectations that aspiring traders usually have. And as they say, reality is usually quite different from what we expect it to be. So let’s look at the other side, the reality, the darker side i.e.

• The other side of Independence is responsibility – responsibility to succeed at something by oneself, all by oneself – the impact of this on one’s self-worth can be massive, much more than one can even imagine – Especially if you’ve had considerable success or acceptance in your previous career, the impact could be even more.
• The other side of freedom to use one’s time could be either indifference or obsession, both the extremes won’t help usually, obsession is a shade better than indifference though
• Long streaks of losses can psychologically break the strongest of the people, which can have further ramifications, from depression to suicide, yes I am serious.

While all that I described above could be two extremes and the reality would be somewhere in the middle, but I guess what matters is

a) Getting a better sense of reality before diving into this business, yes I call this a business because, like any business, this too requires you to risk your time and money.

b) Developing a plan which includes the possibility of a fairly long learning curve 

c) Viewing this as one of the ventures in your entrepreneurial journey

d) Viewing trading as a performance sport – which would mean hours and years of practice and focused effort and an understanding that you need to be at the top of your game and like anything which is performance oriented very few can be.

e) Viewing the effort towards the goal not just in a linear sense, but also in another sense, be open to the idea of landing on something else altogether, in a serendipitous sense, which could alter the course, perhaps all for your good.

f) Finding like minded people to work with, not falling into the lonewolf trap, there are limits to what one can do by oneself

So with all this said, you can imagine how your everyday life as a trader is going to be. In all probability, you may end up being unhappy, and fairly stressed more number of days than you ever imagined. Depending on your general constitution, it may also affect your health. Depending on the quality of your relationships and life context that too may suffer. All this happens not just in trading, this is the truth for any entrepreneurial venture.

Even after being aware of all this, it’s still different when it really hits you. Because in the beginning, you tend to think “maybe it may work out differently for me” and then it doesn't, you may delude yourself for some time but then, sooner or later it does it hit you. And when it does, you end up asking yourself questions like – Till when do I be in this venture? Should I just quit and take up something else?

Valid questions with no simple answers.

As clichéd as it may sound – as they say - Nothing great ever was that easy.  

Dealing with multiple time-frames

Before I became a serious Intraday trader, I used to trade on multiple time frames. 

Yes, some trades were scalps, some intra-day swings, some positional trades as well thrown in. The net result always had been in Red. The combinations would be different though, Green on Intraday / Red on Positional or vice versa.

The real consistency in my P/L happened only after I stopped participating in Sprints and Marathons parallel-ly. I realized marathons are not for me.

The idea I am trying to point to is, the probabilities and the risks associated with trading in different time frames is very different.  And its humanly impossible to do justice to both as one lone retail trader. Yes, if you have a team to work with, each with their own specialization, its a different ballgame.

Not recommending, but what has worked for me, given my limited resources and disposition is to focus only on Intraday time frame.

Think about your losses and red days, and see if mixing time-frames is the culprit.

Think of this before you start your trading this year - 2018

One of the fundamental ways to become better at anything is "Reflecting", more about it here.

So here is something you may want to start your year with,

Think about the following two contexts and the questions linked with it

Context 1 - Think of -

What kind of feeling that you like to end your trading day with? -> What kind of behaviors lead to that feeling? -> What kind of scenarios lead to that feeling -> How often do such scenarios occur? 

Context 2 - Think of -

What kind of feeling that you "DON'T" like to end your trading day with? -> What kind of behaviors lead to that feeling? -> What kind of scenarios lead to that feeling -> How often do such scenarios occur?

Thinking of the above two contexts will solve many if not all of your trading issues.

All the very best for the coming trading year! 

Tuesday evening musings - Learning from the master

I've always been interested in the skills development space, more specifically in the context of crafts. In my attempt to dig up more literature in that area, I came across two books. One, is 'Shop Class as Soulcraft: An Inquiry Into the Value of Work by Matthew Crawford' and the other is 'The Craftsman by Richard Sennet'. Both excellent reads for those looking at understanding the virtues and value of manual work.

Getting to why I got to write this post. This morning while coaching one of my students, a sharp boy I must say, asked me very specific trade execution related questions and I was pleasantly surprised and glad that he did. He was one of the first among perhaps, 50 odd people who I have coached, to ask such questions. That's when I was reminded of what Sennet says in the book while describing how people learnt in Antonio Stradivari's workshop.

    Page 78, The Craftsmen

Why 95% of traders fail? | Perspectives on that statistic

A few weeks back I had answered a question on Quora?

https://www.quora.com/If-only-5-traders-can-make-consistent-profits-in-the-share-market-what-qualities-and-skills-make-them-unique-to-achieve-these-types-of-results/answer/Sandeep-Rao-7

Incidentally came across another article on the same theme here - 

https://breakingoutbad.com/2017/09/03/bullshit-95-of-traders-fail-trading-is-gambling/

Good to see someone else endorsing the same ideas. I will leave you with a few excerpts.  

Something I said in the answer. In fact good traders have a very high demand in the industry, more so in India. I personally know people willing to hire mature/responsible traders with a proven track record.

One thing that people need to understand is, growth in any business including trading can be exponential, which a 9 to 5 job can never provide. But getting to the point of inflection, could take time. That is the test, perhaps. Can you hold on till that point, or would you quit before that. Choice is always yours. 

Note to Self - Understanding and leveraging one's Body Clock

This thing has been running on my mind for long. I have reflected a lot on this too.

My thoughts are specifically about three activities which are key to my lifestyle.

1. Work i.e Trading - I cannot do much about the timing here, its fixed. But Yes I know I am a better trader in the mornings.

2. Creative Work - This includes blogging, writing, reading, and every thing else that I do. Early mornings 5 to 6 works best here for me. For work such as carpentry etc. weekends are best.

3. Exercise/Running - Here, I need a bit of glucose in my body, perhaps a cup of coffee and I am good to go. I have observed my ability to exercise in the mornings anytime between 6 to 8 is far far better than any other time slot. 

With these three things sorted, I plan all other activities in the leftover time slots. This is obviously a work in progress. 

I still remember one of my colleagues at work used to talk about Cognitive time vs. Chronological time, only now I have been able to grasp as to what he was alluding to.

Note to Self - Learning from Losses

There are three things I learned from loosing, ie. taking losses, sometimes large losses. 

1. Personality Fit - I realized what kind of trading style fits my personality, to what extent am I comfortable taking losses. That is when I became damn sure, that it has to be scalping/Intraday trading for me. I cannot think of overnight positions and managing those positions first thing in the morning. I also realized I do not like taking losses once the trade moves in my favor.

2. High Probability Set-ups - Now this one, is learnt better when losses happen consistently in certain set ups, for me it was Mean Reversion Trades + Scaling-in which used to cause disasters.  I thought about it and found quite a few solutions to the problem. Usually if a set up is consistently failing, the reverse of that should be profitable, and that worked for me. I also realized the potential risks of averaging down, and the context in which it works. 

3. Money/Profits are fungible - This one becomes relevant when you make up the losses that you made. The whole process of loosing and then making it up, gives you a sense of confidence, it also helps you compare and contrast your own approach to trading then and now. Lastly, It makes you more open to taking defined risks.

So here's my thank you to 'Losses' that I made. I am glad you came.

Note to Self - Full-time trading & freedom

Was speaking with some friends over lunch today, and they asked me as to why I choose to be an entrepreneur, yes that is how they look at full time trading. My immediate answer was "freedom". 

One of them then asked, why does one need so much freedom, in other words what's the use of that freedom. That is something I was being asked for the first time by someone. This time around, I thought for a few minutes and said "Freedom to spend as much time as I want to, on becoming better at my chosen vocation"

Note to self - “Freedom makes a huge requirement of every human being. With freedom comes responsibility. For the person who is unwilling to grow up, the person who does not want to carry his own weight, this is a frightening prospect.”― Eleanor Roosevelt 

Hardest game in the world!

Every word of this is true!

Source Unknown - Please comment/email the source and I will update. Thanks.

Why and What of NiftyScalper?

Genesis of NiftyScalper

It all started a few years back, when I began searching the web for information on Scalping. I did find some information in bits and pieces. One of the most relevant ones was by TastyTrade, yes, the one that I am currently reviewing on the blog.

There were a few others in bits and pieces but none spoke from an Indian context. None talked about the best products to scalp in India. I had to do a lot of "recontextualization" to make that knowledge/information relevant for me. A little more than a year went into it.

Given that we have thousands if not millions of aspiring traders and scalpers, I felt quite strange that there is such a dearth of information, I mean quality information in the context of scalping.

That's when I decided, let me be the person who puts the content together, the idea was to use my experience to reduce the learning curve for others. By this time I also had made copious amount of notes from various sources, which I wanted to share with those interested.

That's how niftysalper.com was born.

What can you expect from NiftyScalper?

Content - We would bring scalping related content with an Indian context. It's important because Indian markets are very different from other geographies in terms of data availability, tools/technologies and break-even costs of various products and hence we cannot blindly follow what works in those markets.

As shared earlier, there is a huge gap in terms of availability of quality content, we would try to bridge that gap as well.

Lastly, there are several facets to trading. Its the combination of these facets that makes or breaks a trader. Everything from Product Selection, Execution Mechanics, Market Awareness to Trading Psychology plays a role in refining our trading skills. 

The aim is to structure the content on the blog in a framework that connects all these aspects.

Coaching - The second piece which we would focus on at NiftyScalper is Coaching. When I started my journey a couple of years back, I literally didn't have anyone I could go to. And those who were accessible discouraged me from scalping., calling it a wild goose chase. In retrospect I think it would have helped if they had shared with me the possibilities and risks associated with this trading technique and let me choose if it was suitable for me.

One of the thing a lot of developing and aspiring traders/scalpers look for is some sort of framework i.e connecting the dots across the various facets of scalping. Secondly, there could be people who are inherently (for various reasons) find it difficult to read and understand, they would someone to handhold them. Lastly, as a trader moves on his or her learning curve we at times need someone to bounce our ideas off to. The purpose of coaching would be to bring all this and more for aspiring scalpers.

Community - As James Surowiecki says, "Many are smarter than a few", and that holds good for us too. At the end of the day there is only so much that I can do and there is only so much that I know. But to broaden the horizon of our learning, we would also need to reach out to others who are on the same pursuit, perhaps at various levels on the learning curve. At NiftyScalper the attempt would be to bring this community of scalpers/traders and learn from each other.

Guess that's pretty much for this BLOGCAST. Do write in.  

The myth of overnight success is just that, a "myth" - Maria Popova

I can’t agree more with Maria Popova. I am an ardent follower of Brainpickings where she blogs on life, philosophy and everything in between. The lesson in one of her blogs that struck a chord with me is the one which she titles “7 Things I Learned in 7 Years of Reading, Writing, and Living” where her last lesson is about “The myth of overnight success is just that, a "myth"” in which she talks about why anything that is worthwhile is bound to take a long time.

I bring this up because, this is quite the opposite to how an up-coming trader views his or her success in the field of trading. More often than not many newbie/wannabe traders (have been speaking with quite a few off late, hence this blog post) that I have interacted with seem to get in because of its glittery-fast-lane image and the purported freedom from outside control.

Believe me that was my preface as well - independence and fast money, only to be put in place by having my skin in the game… and boy did I get burnt!!

So fellow (new) traders, at the risk of repeating myself, it will take time, effort and ‘deliberate practice’ before we truly can see some success. There ain’t no silver bullet.

Why do I Scalp?

This is the my first blog post on the site and let me be overwhelmingly honest. I have no clue as to how its going to shape up. But one has to start somewhere and here it is.

I thought of writing the first post about something that the whole site is dedicated to i.e "Scalping", and more importantly as to - Why do I do what I do? in other words - Why do I Scalp?

To understand that, we will look at Scalping through three lenses.

Personality - I think this is one of the key aspects of trading success, in the sense one has to find a strategy or method that suits their personality. One element of my personality is Risk Aversion, yes before you make that obvious expression, let me explain. Here I am referring to "Overnight Risks". I just cannot sleep in peace with open positions. That's me. Even if its just  two piddly lots, it weighs on me.  

A related aspect is, scalping or day trading gives you the freedom to close your day, when you want to trade and also to choose how many days you would like to trade. And as I said earlier, when you are not in trade you not in trade - its as simple.

Opportunity Cost - Since I am a full time trader, if I do not make the best use of my time, its not fair. And Scalping is the only strategy for which there are opportunities practically every minute the market is open. So to make the best use of my presence in front of the screen, I scalp and scalping gives me the best relative yield for the time invested.

Developing Expertise - This one needs a bit of an explanation. When I reflect on all the other careers/jobs I've had in my life, one thing that made me leave those jobs was the fact that most of them had changing expectations from me. One year it was some work and the other year something else, at the end you become sort of, a jack of all trades. Perhaps all corporate jobs are like that. At end you do not feel a sense of satisfaction which you get from refining and improving on a specific skill. This is where I use to envy trades/professions where there is a constant use of the hand and head, where variables in the context of practice are well within your control. In the context of trading, the markets are not in your control but everything else that you do is indeed in your control. That I think is very critical for expertise development.

So what's all this got to do with Scalping? - Well the line of reasoning goes like this - I intuitively felt that I need to be working at something where I can constantly practice a skill, and refine it over a period of time + In an environment where a fair number of variables are in my control + and (Borrowing from Malcolm Gladwell's 10,000 hour rule) - I wanted to get past the 10,000 hour threshold as early as possible. - So as to develop expertise.

Since scalping gives you innumerable opportunities to practice your craft, and if you do practice and make use of the opportunities, I guess there are fair chances that you would be able to develop some sort of expertise in it. You are not dependent on the opportunity to show up. This for me is one of the biggest advantages.

Think about it. How many professions give you such a structured and predictable opportunity set to practice? 

So that's pretty much for this post. More later.

Please Note - Each of the blog posts which are categorized as "BLOGCAST" would have an accompanying audio both on SoundCloud and YouTube